Question

Problem 3. A loan of $10,000 is being repaid with payments of $1,000 at the end of each year for 20 years. If each payment is immediately reinvested at 5% effective, find the effective annual rate of interest earned by the lender over the 20-year period.

Answer 1

Solution:
Effective rate of Interest :
=[(1+(r/n))^n] -1
r= rate of interest
n= number of times interest compounded

It is compounded annually for 20 years at 5% rate
   =[(1+(r/n))^n]-1
   =[(1+(0.05/20))^20]-1
   =[(1+0.0025)^20]-1
   =[(1.0025)^20]-1
   =(1.05120) - 1
   =0.05120
   =5.12%